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Banks have been among the best performing stocks in the UK this year, as higher interest rates provided a boost to the sector, despite concerns about the domestic economic recovery.
Shares in NatWest had the highest returns this year to mid-December, rising 101 per cent including price increases and dividends, according to investment website Hargreaves Lansdown. Barclays Bank was the fifth best performing stock, up 81 per cent.
UK lenders were supported by higher interest rates, which were cut in August after nearly a year to 5.25 per cent. This high level has allowed them to generate attractive net interest margins – the difference between the amount they pay on loans and the amount they earn on deposits.
Analysts say banks also benefited from a benign economic environment in which fewer people defaulted on loans – a positive for lenders. However, the outlook for the economy is mixed. Although the International Monetary Fund raised its forecast for UK economic growth in October, the latest figures point to a second consecutive monthly slowdown in October.
Susannah Streeter, head of money and markets at Hargreaves Lansdowne, said NatWest in particular had “been on a roll” this year, pointing to its third-quarter trading results, which beat expectations.
“With interest rates expected to stay a little higher for longer, this improves fundamental performance because it keeps net income margins strong,” Streeter said. Barclays also benefited from lower-than-expected bad loans, she said, adding that the bank had a “good grip on costs”.
Standard Chartered was also among the top ten performers this year, achieving a 54 per cent increase on a total return basis.
Aside from banks, “recovery” stocks – those that have the potential to bounce back after a decline – also performed well. John Moore, chief investment officer at wealth management firm RBC Brewin Dolphin, pointed to aerospace company Rolls-Royce and British Airways owner IAG. Shares rose 94 percent and 84 percent, respectively, on a total return basis.
“Rolls-Royce may be the poster child for recovery, not just this year but throughout the next decade,” Moore said. “For some, the business appeared to be in a very difficult situation, but refocus and improvements in the areas of civil aviation and defense have led to increased cash generation.
“The continued recovery and momentum in aviation has also helped IAG which has, as a result, been able to increase its revenue per passenger and, despite prioritizing investment and a strong balance sheet, still finds surplus profits to pay a dividend for the first time. Since 2019 “
Richard Hunter, head of markets at Interactive Investor, added that the British Airways owner was “now on a strong rise”, noting that the surprise announcement of a €350m share buyback program in November was another reflection of its strong recovery.
“In fact, stocks have remained down 30 per cent over the past five years to pre-pandemic levels, but the scope for further recovery is strongly evident given the price performance over the past two years, with stocks up 127 per cent,” he added.
Corporate takeovers have featured prominently this year, helping to boost the share prices of Hargreaves Lansdown, which was bought by private equity firms including CVC Partners, and packaging company DS Smith, which was acquired by US operator International. Hargreaves Lansdown shares are up 56 per cent this year, while DS Smith shares are up 85 per cent, putting both companies in the top ten performing stocks.
